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The Bubble is Back: Be Afraid!!!

The cover of the latest edition of the Economist heralds a resurgence of the US investment banks. (Oh, aren’t those the TBTF institutions that are more frighteningly LARGE after bailouts, shady loans & shotgun weddings overseen by the Treasury…?)

It is more evidence that current editors & writers for this publication are as out of touch with reality as they are bereft of knowledge of basic microeconomics.

What is happening is that years of central bankers engaging in a form of central planning have fixed interest rates at almost zero. In turn, this has had the same distorting effects in financial markets as does price fixing in goods markets.

But much worse is that the mis-pricing of risk has undermined the real sector of the economy causing deindustrialization as funds are diverted into financial assets. Banks are de-incentivized to lend to manufacturing or industrial ventures since they can make mountains of money simply holding or trading sovereign debt that involves much less risk & is much less costly.

The “financialization” of the US economy explains in large part why unemployment rates in the US remain stubbornly high & GDP growth rates remain low. Yet all this is being done in the name of “stimulating” economic recovery or tampering with targeted sectors.

Does no one notice that forcing down mortgage rates is likely to pump air into yet another real estate bubble, just as the excess liquidity is inflating stock market indices.

In all events, this is an old story whereby negative “real” interest rates induce lending that is non-economic inasmuch as it will not & cannot be supported by existing production levels or productivity growth.

It is not merely economic ignorance that is at play. It is that too many “learned economists” are backing the wrong horse. Support for economic “stimulus” is based on a repackaged argument that involves using monetary policy to create-something-out-of-nothing.

History provides voluminous evidence that the advice of inflationists (remember John Law?) leads to extensive economic grief.

Beware! (But feel free to make hay while the sun shines since much money can be made playing the markets.)

About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.